Start-ups better off with angels than VCs

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Self-financed angel investors are often found where venture capitalists fear to tread. They typically provide seed financing to start-ups that is counted in the thousands or tens of thousands instead of the millions VCs have to throw around.

A newly released academic study (52-page Acrobat file) finds angel investors also cut the start-ups they invest in better deals, both in early financing rounds and in cases where the company eventually makes its way to an initial public stock offering.

If our conjecture is correct, then an entrepreneur may be better off avoiding a venture capitalist altogether and going to an angel to obtain their financing.
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While venture investors are prone to underprice IPO firms, reducing the
proceeds from the offering, angel investors have incentives more aligned with non-venture capital, pre-IPO shareholders.

The working paper by William Johnson and Jeffrey Sohl of the University of New Hampshire’s Center for Venture Research found that a substantial number of initial public offerings have angel investors as their only investors — 13.4 percent.

The authors of the study also find that firms with at least some angel involvement exit via IPOs earlier than purely venture backed firms. They suggest another factor is at work here — angels are typically not just wealthy individuals with a passive interest in the companies they invest in but former executives or professionals with an intimate knowledge that can give entrepreneurs a leg up in terms of business experience.

The bad news for entrepreneurs is that angel investment appears to have fallen sharply relative to venture capital. An annual survey by the Center for Venture Research released earlier this year found angel investment declined nearly 26 percent to $19.2 billion in 2008. That compares to the $30.9 billion invested by VCs last year, an 8 percent decline from 2007, according to data from the National Venture Capital Association and Thomson Reuters (See Jan 24, 2009 release).

But don’t count angels out just yet. A check of Google shows searches for venture capitalists falling steadily since data started being kept five years ago. Searches for venture capitalist in 2009 are only slightly above those for angel investor.

Author Profile

Eric Auchard is editiorial innovation director at Reuters News. He builds tools to help journalists at the world's largest news organization report, edit and present the news.
In 2009, Eric was a technology investment columnist for Reuters. Previously, he was the chief technology correspondent from 2000 to 2008. His main focus was covering consumer Internet trends, global technology competition and emerging technologies. He has worked for Reuters covering technology news since 1993.
He began covering politics for Reuters in in California in 1992, then moved to Washington. He moved to New York and switched to technology writing for Reuters late in 1993. ...